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May 12, 2017

Warehousing: To Invest or Outsource ?

Shall I do this myself or is it worth paying someone else to do it? This is a question that many people ask themselves during the day, usually in the context of cleaning the house or washing the car. Businesses also ask themselves the same question in the context of their warehousing strategy and the answer isn’t always very apparent. The question of whether to invest in warehousing or to outsource, is one that businesses have struggled with for many years. Academic literature and supply chain studies are full of debates on the benefits and drawbacks of each approach. However, we believe that advancement in warehouse technology and the consequent benefits across the entire supply chain have shifted this debate firmly in favour of outsourcing. In this article, we will look at this classic debate within the current context of technological shifts in the warehousing industry, considering factors to be taken into account before businesses decide whether they should invest in their own warehousing, or simply pay a specialist to do it for them.

To start with, we will consider some of the traditional arguments for investing in and maintaining in-house warehousing, examining their validity.

Warehousing as a strategic source of competitive advantage — “Warehousing is an intrinsic part of my business and I want to invest in it and use it to beat the competition”

There is no doubt that minimising the cost of warehousing can have a significant impact on overall business profitability. In certain sectors, such as chemicals, the cost of warehousing can be as high as 4–5% of total revenue. If you consider the overall costs of carry in a supply chain, as illustrated below, effective warehousing can minimise both service and storage costs and especially the risk costs which can be quite substantial!

Clearly, creating an efficient, cost-effective and flexible warehousing strategy can become a significant source of competitive advantage in such a sector. For some businesses, this strategy will indeed be the case and the most notable example that springs to mind is Amazon, who have an incredibly efficient logistics platform that has propelled them to be the top internet-based retailer globally with $136 billion of sales in 2016. What does it take to get to that level of efficiency and dominance you may ask?

Well it’s worth considering the investment made by Amazon to reach this level. During the period of 2010–2013 they spent $13.9 billion on building 50 new warehouses across the globe. That averages to $278 million per warehouse! We’ve come a long way from oversized sheds in which inventory was stacked up high. Today, the level of technological investment required to optimise every last square foot drastically reduce storage costs is of paramount significance.

Another market leader in the warehousing sector is DHL, who have spent millions of dollars introducing Augmented Reality (AR) technology across their warehouse operations. Picking costs represent 60% of DHL’s total warehousing operations cost and the implementation of AR technology within the warehouses has contributed towards a 25% increase in worker efficiency and 40% reduction in errors where it had been implemented — which translates into more efficient and cost-effective supply chains worldwide. The results of these investments in technology can be leveraged by individual companies to achieve far more economical costs and flexible supply chains that are in a different league to what most businesses can achieve without million dollar investments. To emphasise the point — the focus on optimisation, continuous improvement and cost savings are driven by technology which requires substantial investment and either you have the capabilities and resources to make that investment or not. Only having access to traditional low-tech warehousing will put you at a disadvantage versus your competition, who will have access to significantly better technology and lower costs. Put very simply by the late Lee Kuan Yew of Singapore:

“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business”

If your warehousing and logistics are really a core part of your business, that you hope to grow and develop into a market-leading operation and you have the necessary resources then it makes sense to make the investment in it. If not, why not spend the time and money actually focussing on the core aspects of your business and leverage the capabilities of third party logistics providers (3PL’s) to help you stay at the forefront of technological advancement in warehousing.

Warehousing as an asset — “Warehousing is an investment and will create an asset that will grow over time — it’s better than spending money on outsourcing that I will never see again”

Let’s look at the evolution of warehousing over the last 30 years:

As you can see the concept of a warehouse has evolved from a large building with a solid roof to a “smart” building which tracks individual items, uses cutting-edge automation to cut labour costs and generates data on the processes that allow iterative optimisation. In the past, the bulk of the value of warehousing was the commercial real estate on which it was situated and as the value of land rose, the value of your “asset” increased. However, going forward, it will be the technological capabilities within your warehouse, that will be the major source of value and the question of whether a company can keep up with the technological change will determine whether warehousing becomes an asset or, in fact, a liability. In 2012, Amazon spent $775m acquiring Kiva Systems, which became Amazon Robotics — and they have 30,000 automatons (small robots) across its warehouses, picking items from containers and transporting items around the warehouse. Deutsche Bank has estimated that if Amazon implemented the technology across all of its fulfilment centres, it would provide an annual saving of $22bn in costs.

Kiva Systems robots — Now Amazon Robotics

UPS spent $2.2bn on its WorldPort Facility in Kentucky, which includes over 155 miles of conveyors and can process 416,000 packages per hour — the largest facility of its kind in the world. UPS are also spending more than $1bn a year on “intelligent logistics” and their Strategic Enterprise Funds have made investments in drone technology to further increase automation and cut costs in their warehouses. The combination of these economies of scale and the level of technology in these operations have reduced delivery and storage costs across the globe and created same-day delivery across a number of products. With this in mind, it’s important to consider whether buying a long-dated warehouse lease is really an investment … or a liability versus your competitors who can tap into these billion dollar investments in technology at the click of a button.

Control over business operations — “I want control over my supply chain and don’t want to rely on anyone else”

Owning the end-to-end process in any industry is something many companies strive for and allows them to reduce dependencies on other firms, increasing their autonomy. However, there is no doubt that there is a trade-off between autonomy and efficiency with regard to warehousing. Advancements in WMS (Warehouse Management Systems) and tracking hardware have meant that it is now more possible than ever before to really have oversight on your inventory. Using the latest hardware in cargo tracking and surveillance allows a company to have real-time updates on its cargo from a factory in China all the way to a warehouse in the UK. Use of RFID (Radio Frequency Identification) enable businesses to have real-time updates on the exact quantities of their inventory and locations of stock, as well as generating valuable data to help improve business processes. Ultimately, you are still relying on an external provider and you don’t own the entire process but the question is are the cost savings, data collection, inventory accuracy and expertise all worth it?

Now let’s look at some of the additional advantages of outsourcing your warehousing to 3PL’s that we have not yet explored…

One of the main advantages comes in the form of flexibility and ability to respond to dynamic trends. We have discussed the concept of a bi-modal warehousing in more detail in a previous post, but the bottom line is, in an uncertain environment, every business should have an element of optionality and flexibility in their warehousing strategy. This includes being able to effectively scale up business, including international expansion, but also being able to “turn-off” unused capacity if necessary. Also related to optionality is the issue of not having significant amounts of money invested in one location which provides you with the geographical flexibility to respond to new consumer trends and optimise your storage location based on demand.

In addition, warehouses are not stand alone operations — much of their efficiency relies on their ability to transport and distribute goods around the country e.g. being part of a pallet or courier network. In this regard, being part of a large warehouse operation and distribution network allows businesses to benefit from the network effects built up over many years and strong relationships — that translate into lower shipping and distribution costs.

Our central thesis is that the advancement in technology has made the decision of whether to invest or to outsource in logistics far more skewed in favour of outsourcing. But is the trend unique to logistics?

How many young millennials are owning cars vs taking Uber trips?

How many couples are owning holiday homes vs using Airbnb for holidays?

How many people are owning music collections vs using a Spotify subscription?

In the same way technology has enabled us to move from the ownership to experience economy in the personal sector, technology is enabling us to move from the ownership model to leveraging external expertise in the business sector. The most notable example being Amazon Web Services, which provides efficient and cost-effective cloud-computing services for businesses. We’re willing to bet that the same trend will be prevalent in the warehousing industry, as technology increases the gulf between what is possible and the status quo. It comes back to the old business adage “Master your strengths, outsource your weaknesses”. Focus on your core business and tap into flexible, on-demand, high quality warehousing solutions when, where and how often you want — at a click of a button.

We at Stowga believe advancement in technology means now is all the more reason to double down on your core business priorities and leverage external investments in technology and infrastructure to optimise your warehousing and logistics. We are connected to over 4,000 sites across the UK and would love to hear from you to discuss potential solutions for your business.

Sanjeev Jeyakumar — Head of Sales and Business Development at Stowga. Please get in touch if you would like to discuss further at sanjeev@stowga.com